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Scary Oil

Mar 15, 2012Nouriel Roubini
Today’s fragile global economy faces many risks: the risk of another flare-up of the eurozone crisis; the risk of a worse-than-expected slowdown in China; and the risk that the US economy's recovery fizzles (again). But no risk is more serious than that posed by a further spike in oil prices.

NEW YORK – Today’s fragile global economy faces many risks: the risk of another flare-up of the eurozone crisis; the risk of a worse-than-expected slowdown in China; and the risk that economic recovery in the United States will fizzle (yet again). But no risk is more serious than that posed by a further spike in oil prices.

The price of a barrel of Brent crude, which was well below $100 in 2011, recently peaked at $125. Gasoline prices in the US are approaching $4 a gallon, a damaging threshold for consumer confidence, and will increase further during the high-demand summer season.

The reason is fear. Not only are oil supplies plentiful, but demand in the US and Europe has been lower, owing to decreasing car use in the last few years and weak or negative GDP growth in the US and the eurozone. Simply put, increasing worry about a military conflict between Israel and Iran has created a “fear premium.”

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Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

There's another risk in the ME which is for some reason glossed over: The Arab Spring's effect on Saudi Arabia and other oil-producing countries. In other to keep the populace from revolting, the saudis had to expand brib^W social and other programs. Some estimates (e.g. "Why the Saudis want $100-a-barrel oil" at Washington Post) argue that the saudis need $100/bbl to afford it. This situation isn't much better at other autocratic oil-producing countries - Russia needs $110/bbl to keep it's programs.

Since none of these leaders wants to end up like Gaddafi or Mubarak, there's no way to pressure them to lower prices. So we're stuck with >$100 for a good while.

The basic premise that Israel's threat to attack Iran is growing and will continue to do so as the year progresses is probably wrong; the risk is receding and will probably be slight after the November election. The Obama administration is not going to engage in armed hostilities with Iran no matter how much it is egged on my its client state Israel. At the end of the day, Israel is still a client.

The assertion that US and Israel aims and plans are "converging" seems fanciful.

The assertion that the US is rejecting containment and the idea of accepting a nuclear Iran which could be contained by deterrence also seems fanciful. Deterrence works.

The assertion that Obama's political statement "doesn't bluff" guarantees inevitable military action indicates an inability to grasp the art of posturing in these types of situations.

The idea that the US military is conducting joint exercises with Israeli military forces so they can conduct a joint campaign against Iran seems like some sort of Likud party fantasy. A joint campaign against Iran may or may not stop the Iranian nuclear program; it would probably bring down the government in Washington, some of whose denizens may grasp that point.

Overt military action would bring on a recession, or possibly something much worse. Therefore overt military action involving the US military is probably remote. Why have a recession when the simpler, cheaper alternative of deterrence has a proven record of working.

Yes, tensions are rising across the Middle East. Most likely, countries outside of the region will stand by and watch as they boil over here and there, possibly with horrific consequences for the people involved. Nevertheless, the outside nations will most likely stand by and ultimately watch. Libya was an exception, not the new model.

It might be difficult to see at first but the whole tension, and all the problems could be inflated by a single decision: abandoning our present, artificial and totally unnatural constant growth, expansive, exploitative economic model and the geopolitical structure maintaining and serving it.
Moreover we do not even have much choice in the matter as this model is self destructing as we speak, either by to collapse of the artificially inflated financial markets, or growing public awakening leading to violent demonstrations, even civil wars, or exhausting natural resources, or increasing pollution leading to catastrophic climate change, or regional or even world wars to capture the remaining markets and energy resources, either way we are in an end game.
The usual evolution method of waiting until the situation becomes unbearable and then change would be very unpredictable and disastrous.
The wise move would be to take stock, humbly accept defeat with our present civilization model, and start building a new mutually considerate structure based on our historical experience and the scientific, factual knowledge about our new, global and integral world, helping people understand world wide that we are totally interconnected and each of us depend on everybody else.
As the article suggests, we are running out of time to make the wise decision.

Absolutely, I agree with you Prof. Roubini, but I would also suggest you consider another fundamental cause of the current global recession.

Believe it or not, we have made a serious mistake in real markets and have developed no integral public supply chain infrastructure at all over the last 20 to 30 years of the Modern Information Age. I believe this lack is the real cause of the current worldwide economic crisis.

Please see: “To have Prosperity or to have Decline, it depends on Your Choice” http://goo.gl/AeP9O

Without first developing the appropriate public infrastructure by fixing that mistake in the modern supply chain information market, every new effort will be just as ineffective and useless as everything else we have tried. That is, there will be no sustainable solutions for the current economic and social crisis, whatever we do. I believe our leaders and people should recognize this as soon as possible.